RESOURCE NATIONALISM IN ARGENTINA

C O N F I D E N T I A L BUENOS AIRES 000103 SIPDIS SIPDIS STATE PASS EEB FOR GLENN GRIFFIN E.O. 12958: DECL: 01/27/2018 TAGS: AR ENRG EFIN ECON EMIN EINV EPET PGOV EAGR SUBJECT: RESOURCE NATIONALISM IN ARGENTINA REF: A. 07 SECSTATE 150999 ¶B. BUENOS AIRES 58 ¶C. 07 BUENOS AIRES 2313 ¶D. 07 BUENOS AIRES 1892 ¶E. 07 BUENOS AIRES 1819 ¶F. 07 BUENOS AIRES 1278 Classified By: Ambassador E.A. Wayne, Reasons 1.4 (b and d). ¶1. (U) Post's response to Reftel A inquiry about the presence of resource nationalism in Argentina is tracked to reftel questions. -------------- -------------- EXAMPLES OF ACTIONS/POLICIES MOTIVATED BY RESOURCE NATIONALISM -------------- -------------- ¶2. (C) The Government of Argentina (GOA) has in recent years enacted frequent changes of rules that have affected hydrocarbon and mining activities and can be at least partially attributed to resource nationalism. Recent examples include the increased export taxes on crude and refined hydrocarbons, the 2006 unilateral abrogation of tax exemption laws in the far southern province of Tierra del Fuego, and the November 2007 enactment of new federal mining export taxes (ref C). The GoA also recently began to apply to the downstream oil industry the Peron-era Supply Law, which obligates companies to provide sufficient supply to meet demand, even if it means operating at a loss. This has reduced downstream margins by requiring companies to import diesel at high world prices and sell to local consumers at much lower local prices. If they do not comply, firms face fines and even possible prison terms for company executives. The tax measures have increased resource nationalism in the sense that they have increased the GOA's share of sector rents and also have encouraged some foreign companies to sell their assets, often to local parties favored by the government. However, it is important to note that there are other compelling GOA motives for increasing hydrocarbon and mining tariffs and taxes: to maintain domestic prices below world market levels in the cases of oil and gas (by making their exports more expensive),and to strengthen GOA revenues in order to maintain a healthy fiscal surplus. These motives were probably a higher priority for decision makers when imposing the questional measures. ¶3. (C) Another important example of resource nationalism has been more subtle -- and controversial. The GoA has intervened directly and indirectly in the hydrocarbon, mining, and broader utilities (natural gas, electricity, water) sectors. GoA actions include frequent and often arbitrary changes of rules and regulations, increased taxes, and frozen electricity tariffs. These interventions have devalued existing company assets and are a strong disincentive to investors. Foreign oil, gas, and mining companies have told Post that they consider Argentina to be a less attractive place to do business than many other competing venues. As noted above, over the past decade some companies have decided to reduce investments, sell their (often discounted) assets, or abandon Argentina alltogether. Some private sector analysts have openly speculated that this sometimes difficult business environment has made it easier for local and sometimes well-connected businesses to take over these assets at a discounted price. The GOA has openly stated its desire to increase ownership by Argentine companies and individuals of Argentina-based assets. Over the past two years alone, energy majors CMS, Total, and Electricite de France have departed the Argentine market, selling their assets cheaply to local interests (ref D). Spain-based Repsol/YPF recently sold a 14.9% share of YPF to a local banker (ref F). Media reports also speculate that Esso's reported interest in selling its local assets are motivated at least in part by the same reasons (ref D). -------------- INCREASING NUMBER OF SUCH ACTIONS? -------------- ¶4. (C) In recent years, from the beginning of the post-crisis recovery in 2002 to the present, the general trend of resource nationalism, as described above, appears to be increasing. -------------- BENEFICIARIES OF RESOURCE NATIONALISM -------------- ¶5. (C) The beneficiaries of these policies, whether explicitly intended or not, appear to be those local companies and individuals, and in some cases, those who are close to senior GOA officials. -------------- ADDRESSING RESOURCE NATIONALISM? -------------- ¶6. (C) Post is in regular contact with U.S. companies operating in Argentina and affected by GoA actions that have complicated doing business here. Due to high world commodity prices, many companies in the affected sectors continue to do well, or at least adequately, and most expect the situation to improve over the next five years. Given current (hopefully temporary) bilateral tension between the USG and GoA, any USG action, public or private, should be limited so as to avoid a backlash (perceptions of U.S. interference, ulterior motives). Even in the aftermath of a bilateral rapprochement, high-profile USG action would likely inflame this country's historically rooted resource nationalism tendencies, and could complicate the situation of U.S. companies. This is not to say that there is nothing that can be done to influence Argentine thinking. In a low-key manner, we seek to identify reasonable interlocutors within the GOA leadership, media, and in civil society and talk to them, in a non-didactic way, about the costs of heavy-handed intervention in the economy overall, and in the hydrocarbon/mining extraction sector in particular. Our message is that, whatever their motives, such policies harm the economy and national development and scare off potential investors. We argue to Argentine interlocutors that open economies have proven more effective than interventionist, autarkic ones in dealing with the development challenges posed by our globalized international economy. ¶7. (SBU) Post believes the best course of action is to continue to reinforce our low-key, company-specific and to date effective advocacy in this often difficult market, and to also continue to emphasize the benefits of U.S. investment to GoA leaders and the Argentine public. We also believe that building on Post's already prodigious efforts will positively affect Argentine views. In order to refine and coordinate our message, we also will continue to consult regularly with other embassies, companies, and IFIs in relation to resource nationalism. -------------- COMMENT -------------- ¶8. (SBU) GoA leaders likely believe that there is real political value to intervening in natural resource-related markets, as such actions are seen by many of the government's core constituencies (particularly by organized labor and the poor) as demonstrating renewed sovereignty over Argentine resources. According to polls, the Argentine public by wide margins is suspicious of foreign investment and foreign control of national industries. INR's Office of Research September 2007 Opinion Analysis on Argentina's future noted that "in studies going back more than a decade, Argentines have been consistently distrustful of trade agreements and foreign investment." The report continues that Argentines believe that more open trade transactions with other nations and FDI is a zero-sum game, with Argentina likely to be on the losing end. The same report indicated that by strong majorities the public believes that the state should be more involved in all aspects of the economy. Therefore, GOA actions to reassert control over national resources conform to a inherent, longstanding bias in Argentine public opinion towards such an approach. WAYNE